175 - Considerations for optimal investment returns

Question:

I have seen several stories in social media about the imminent collapse of the American economy. We recently had a major collapse in the Japanese market and also saw the local stock market fall.  Should we take our money of the markets and invest in gold coins?

Answer:

I cannot give you specific advice, but I can point you to 3 principles that may help you make a better decision.

• Have an investment plan

You need an investment plan.  An investment plan does not consist of putting money into one asset class in the hope that that asset will do better than everything else. That is speculating.  What I'm talking about is a well-considered investment plan that can do the following.

• It can cope with most eventualities in your and your children's lifetimes. Over this period, you will have markets falling and rising, inflation and recession as well as political uncertainty.  Your portfolio needs to be able to cope with these events.
• In must consider the long, medium and short terms.  You can expect volatility over the short term but should be able to live with it if you understand the longer term goals of your portfolio.
• It is diversified across the various asset classes.  This will ensure that if a particular asset class under-performs, your entire financial well-being will not be in danger.
• It is exposed to different countries.  It is never wise to have all your investments in South Africa, USA or even Japan.  A healthy spread can ensure that your financial wellness has some protection should a particular country have political or economic issues.

• Do not make hasty decisions

Do not try to time the market. We often find that after a big fall the markets hit an all-time high. If you are not in the market, you will miss out on that growth. Time in the market is way more important than timing the market.

Below is a table that shows how much growth you would have missed out on over a 22 year period by being out of the market on the days when the market did particularly well: 

We are living in a time where there is a high level of market volatility, and you need to be careful that you do not make the mistake of short term thinking and panicking when the market falls.  Before you make any decisions, you need to understand how that particular decision impacts on your broader investment plan.

If we look at the example you cited.  After falling by 12%, the Japanese market bounced back by 10% over the following days.  The JSE moved from the post-Japan fall to hitting an all time high in the past week. Had you panicked and disinvested, you would have locked in these losses.

• Make considered tactical moves 

There will be times when you should adjust your portfolio to changing circumstances.  So, if you believe that the American market is overvalued, then you could move into other markets.  However, this should be in line with your bigger plan. 

It is risky to put all your eggs in one basket, so I would be concerned if you sold up everything and invested in only gold. However, if you believe that gold coins will add value to your portfolio then you could add it as one of the components of your broader investment plan.

Kenny Meiring MBA CFP ® is an independent financial adviser who helps people put investment and risk structures in place to live wonderful lives.  You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to kenny.meiring@sfpwealth.co.za